Firms to require minimum Rs 500 cr to set up banks

The Reserve Bank of India (RBI) on Monday released draft guidelines on new banking licences, pegging the minimum required capital to set up a bank by a corporate entity at Rs 500 crore while limiting the foreign shareholding at 49%, a move that will allow large corporate to start banks.

For the corporate having strong linkages in real estate and broking sector, the guidelines prove to be a setback as they will not be eligible to promote banks.

As per norms, a new bank should list shares within two years of getting licence and will have to open at least 25% of branches in un-banked rural centres.

RBI has also said that half the directors of the holding company should be independent -a move that will check the undue influence of promoters.

"Private sector entities or groups owned and controlled by Indian promoters, with diversified ownership, sound credentials and integrity and having successful track record of at least 10 years will be eligible to promote banks," said the RBI in its draft guidelines on new banking licences. "The minimum capital requirement will be R500 crore," added the banking regulator.

At present, the minimum capital requirement for the banking sector is Rs 300 crore.

Welcoming the guidelines, Sam Ghosh, group chief executive officer, Reliance Capital, one of the most likely banking entrants, said.

"The draft guidelines contain a strong focus on greater financial inclusion, efficient corporate governance, adequate controls on exposure to group companies, and time-bound milestones for listing. We now look forward to the release of the final guidelines over the next few months," he said.

Following the announcement made by the finance minister in his budget speech in February 2010, RBI had placed a discussion paper on 'Entry of New Banks in the Private Sector' in August, 2010. The last time RBI had issued banking licences was to Kotak Mahindra Bank in 2003 and Yes Bank in 2004.

"Entities or groups having significant (10% or more) income or assets or both from real estate, construction and broking activities individually or taken together in the last three years will not be eligible to set up new banks," said RBI.

Uday Phadke, president - finance, legal and financial services sector and member of the group executive board, Mahindra & Mahindra, said. "Our long experience of two decades provides us with the necessary understanding and strength in the financial services domain," he said.

Sanjiv Bajaj, MD, BajajSer, said: "It clearly allows those business houses with experience in financial services and those that meet fit and proper guidelines to apply. Overall the guidelines seem fairly balanced."